CLO pipeline forecast to resume in May, June; Ireland looks to kick-start CLO market

By Cristal Cody

Tupelo, Miss., April 25 - Spreads have rallied on the light supply in April with new issuance in the collateralized loan obligation market expected to pick up with heavier volume in May and June, according to informed sources on Thursday.

"There was a bit of frontloading into the first quarter to get ahead of the FDIC rule," one source said. "April is relatively light, but I would expect that to change as we get into May and June, as deals will want to get in prior to the summer lull in activity that we normally see in July and August."

The new Federal Deposit Insurance Corp. regulation to treat CLOs as higher-risk assets for calculating deposit insurance assessments for large institutions took effect on April 1.

More than 50 broadly syndicated CLOs totaling $26.5 billion priced in the first quarter and sources forecast about $75 billion in issuance for the year.

As supply dwindled in April, CLO spreads tightened in classic supply-and-demand form, a market source said.

"Spreads were wide when a lot of supply hit the market," the source said. "Since then, supply has been light so we've seen a decent amount of tightening in spreads."

CLO note spreads rallied in the past couple of weeks on a "lot of bullishness," the source said. "We've seen secondary pick up through a few auctions, so it will be a good test to the market when the new issue market picks back up."

New triple A-rated senior CLO notes are holding in a range of Libor plus 112 basis points to 120 bps, with one deal printed on the tighter end, a source noted.

OHA Credit Partners VIII, Ltd. sold its most senior tranche, $244 million of class A senior secured floating-rate notes (Aaa), at Libor plus 112 bps in an offering set to close on May 15.

Older CLO issues, depending on the duration of the notes, are trading from Libor plus 75 bps to 115 bps spread, the source said.

"That shows how strong it is for very short duration triple-A paper as opposed to longer-duration new issues," the source said.

Ireland eyes new CLO deals

The growth in CLOs is attracting attention after deals priced in Europe with Ireland touted as a favorable jurisdiction for structured finance transactions, "particularly CLOs," said Dublin-based law firm Arthur Cox in an April report released on Thursday.

"Recent developments in the U.S. CLO market and the successful closing of Cairn CLO III in March, the first European CLO since the financial crisis, appear to offer tentative signs of a long-awaited revival in the CLO markets," the corporate, tax and finance law firm said. "With the prospect of more favorable market conditions for European CLOs, and with market expectations of other new CLO issuances to follow, there are significant advantages in choosing to locate SPVs for CLO transactions in Ireland."

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